How gold can end confusion on stocks

Michael A. Gayed, CFA, winner of the 2014 Dow Award, is chief investment strategist and co-portfolio
manager at
Pension Partners, LLC., an
investment advisor which manages mutual funds and separate accounts according
to its ATAC (Accelerated Time and Capital) strategies focused on inflation
rotation. Prior to this role,
Gayed served as a portfolio manager for a large international investment group,
trading long/short investment ideas in an effort to capture excess returns. From
2004 to 2008, Gayed was a strategist at AmeriCap Advisers LLC, a registered
investment advisory firm that managed equity portfolios for large institutional
clients. In 2007, he launched his own long/short hedge fund,
using various trading strategies focused on taking advantage of stock market
anomalies. Follow him on Twitter @pensionpartners and YouTube
youtube.com/pensionpartners.

We go from one of the scariest starts to a year in history for stocks and abject terror about a recession, to a strong rally which pushed some market indices positive year to date. Yes, folks, 2016 has not been easy at all. If you were lucky enough to be defensive the first week of the year, kudos to you. But if you didn't participate in the comeback, that defensiveness ended up being a wash.

I've been arguing in writings that we are in what appears to be a "Great Reset" whereby inter-market movement based on decades of research is beginning to take hold the way one would think it should. Cyclicals are this time around trying to lead markets higher, rather than defensiveness which has dominated market bull movement. Reflation does look more and more real, and should it continue, would be positive for commodities, high beta, and emerging markets.

But the environment is not uniformly clear. Following the big comeback, stocks now are wrestling with the question of what comes next. Was that simply a bear market rally which will result in another leg lower to come? Or is the bull market still alive and well? Gold may provide the answer.

Why gold? As referenced in our award-winning paper (click here to download), gold tends to be a leading indicator of volatility when compared to the performance of lumber. The idea here is that when lumber (sensitive to housing) is outperforming gold (cyclically bullish), historically, odds have favored a calmed stock market environment and better returns going forward.

On the other hand, when gold has tended to outperform lumber, odds favored higher volatility and more risk-aversion as stock declines becomes more likely. When looking at the price ratio of lumber to gold
GLD, -1.05%
over the last three weeks, a strong move in lumber has occurred which *should* mean the odds favor a continuation of the move higher. Key to this of course would be that gold does not spike higher in anticipation of another risk-off pulse.

For now, the odds still favor the bulls. Utilities are unable to show near-term meaningful outperformance potential, and should equities hold above various moving-average intervals, the weight of the evidence would suggest the near-term risk is on missing further upside. This does not mean that gold would necessarily do poorly, but rather that other areas of the investable landscape could play catch up. Either way, the confusion on what comes next is likely to resolve much sooner than later.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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